Inequality and growth: evidence from panel cointegration

Abstract

This paper uses heterogeneous panel cointegration techniques to estimate the long-run effect of income inequality on per-capita income for 46 countries over the period 1970–1995. We find that inequality has a negative long-run effect on income, both for the sample as a whole and for important sub-groups within the sample (developed countries, developing countries, democracies, and non-democracies). The effect is economically important, with a magnitude about half as high as the magnitude of an increase in the investment share.

We are grateful to two anonymous referees for excellent suggestions that considerably improved this paper. Sebastian Vollmer acknowledges financial support from the German Academic Exchange Service and the German Research Foundation (grant VO 1592/3-1).